ETP Weekly : Palladium rebounds as likely supply deficit widens

6 mai 2014

A growing sense that markets had over-reacted a to slightly-below forecast Chinese manufacturing PMI reading, led investors to build positions in industrial metal ETPs ranging from aluminum, copper to nickel. We maintain a positive outlook for….

ETF Securities Research

industrial metals in general as the global economic upturn is augmented by a mini-stimulus package in China that will see higher spending on rail and housing infrastructure. As strike negotiations between major miners and unions collapsed in South Africa, platinum group metal prices rose, attracting more investors into palladium in particular. Palladium is likely to face a greater deficit this year according to GFMS.

ETFS Physical Palladium (PHPD) received its highest ever weekly inflow as negotiations with unions in South Africa collapse and threats of sanctions against Russia heat up. US$77.3mn of inflows were the highest since the inception of the product in 2007. South Africa, which normally produces just under 40% of global palladium supply, has struggled to extract this year as strikes at its mines go into their 15th week. Negotiations with the Association of Mineworkers and Construction Union (AMCU) appear to have collapsed and the three main producers, Amplats, Implats and Lonmin Plc Lonmin, have announced that they will consult directly with employees on their revised pay offers. The threat of sanctions against Russia, which produces more than 40% of global supplies, could further aggravate the tightness. The price of palladium rose 3.6% last week in response to these threats against supply (the highest since August 2011), while the price of platinum moved up by a more modest 1.3%. Meanwhile US car sales, a key source of demand for the platinum group metals, showed healthy growth of 8% in April. GFMS, in its latest survey released last week, said that it expects the palladium deficit to reach 1.3Moz in 2014 from a 1.0Moz deficit last year and platinum will move into a deficit of 0.7Moz in 2014, unwinding the surplus of 0.5Moz recorded in 2013.

ETFS Copper (COPA) and ETFS Aluminium (ALUM) received their highest inflows in a month. COPA saw US$25.9mn of inflows and ALUM saw US$20.0mn as the price of copper fell 1.5% and the price of aluminium fell 5.3%. An overreaction to the Chinese manufacturing PMIs which came in a touch lower than expected had opened up an attractive entry point for investors. It is likely that the pessimism based on over-supply concerns will abate. For example, the International Copper Study Group, which had forecast a copper surplus in 2014, conceded that the January balance was a sizable deficit of 23k tonnes compared to a 131k tonne surplus this time last year. We expect further upside surprises during the course of this year.

Physical gold ETPs saw their first outflows in three weeks. Amounting to US$32.3mn, some investors took profit as gold struggled to remain above the US$1300 level reached the previous Friday. Despite a poor US Q1 2014 GDP outcome and ongoing conflict concerns in Eastern Ukraine, a better than expected ISM manufacturing reading in the US and the Fed remaining on course for tapering its bond-buying programme by US$10bn a month pared the gains gold this week.

ETFS Agriculture (AIGA) see highest outflows since April 2013, as investors take profit. As the threat of an El Niño adds to the already difficult crop conditions for wheat and sugar in key growing areas, their prices rose 1.4% and 4.0% last week. US$14.5mn of outflows from the basket followed.

Key events to watch this week. The policy meetings of the Bank of England and European Central Bank will remain in focus as the central banks grapple with low levels of inflation. No immediate policy change is expected however.